NEW YORK | Mon May 14, 2012 – Ally Financial Inc.’s mortgage unit on Monday filed for bankruptcy and the auto lender said it will sell some international operations to help set it on a path to repaying $12 billion in bailout money.
Ally’s mortgage unit, called Residential Capital, or ResCap, filed for bankruptcy protection in federal court in Manhattan under a plan that has the support of some of its creditors, although it was still expected to be a drawn-out and litigious process.
At the same time, Nationstar Mortgage Holdings, which is majority owned by Fortress Investment Group, struck a deal to buy substantially all the mortgage servicing and related assets from ResCap for about $2.4 billion, including debt. The deal will make Nationstar the opening bidder in an auction that will be held under bankruptcy court rules.
“The single-most important thing we can do for the U.S. taxpayer is to not put billions of dollars into this business on a going-forward basis,” Ally CEO Michael Carpenter said in an interview.
Ally, the former lending arm of General Motors Co., has been besieged in the past few years by losses at ResCap, which was once a major subprime lender and profit engine. The company has considered bankruptcy and other ways to shed ResCap since at least 2009, but has never pulled the trigger.
A bankruptcy of ResCap now will help Ally, formerly known as GMAC, focus on its main auto lending business and put together a plan to pay back U.S. taxpayers.
The U.S. Treasury Department injected $17 billion into the lender through multiple bailouts during the financial crisis and now owns nearly 74 percent of the company. Ally still owes the government about $12 billion, counting dividend payments by the lender and sale of some securities by the Treasury.
The bankruptcy filing comes as pressure increases on Ally to repay that money and problems at ResCap become increasingly unmanageable. The Obama administration is trying to show recoveries from crisis-era bailouts before the presidential election in November, and government officials are loath to let Ally become a black mark on the auto industry restructuring.
In filing for bankruptcy, ResCap would also become a rare example of a subsidiary of a bank holding company to do so. As a result, other banks with intractable mortgage problems, such as Bank of America Corp., will be closely watching how the company deals with regulators and creditors and manages the bankruptcy process.
ResCap and its advisers believe it may be one of the first times that a financial services company with retail operations such as a bank has filed for bankruptcy and been able to continue operating.